Share This Story!

How to handle long-term care premium hikes

Three things are certain in life if you're among the eight million Americans who own a long-term care insurance policy. Besides death and taxes, you'll face an extraordinary increase in your premium at some time.

Three things are certain in life if you're among the 8 million Americans who own a long-term-care insurance policy. Besides death and taxes, you'll face an extraordinary increase in your premium at some point.

Case in point: The John Hancock Life Insurance Co. just asked insurance regulators whether it could increase premiums by, on average, a whopping 45.9% on some 8,600 long-term care insurance policies now in force in Connecticut. And, if approved, annual premiums on those policies will rise from the current range of $950 to $2,500, to a new range of $1,246 to $3,280.

According to the AALTCI 2014 Long-Term Care Insurance Price Index, the average cost for a 55-year-old male purchasing $164,000 of long-term care insurance protection is $925 a year. Equal coverage for a single woman costs $1,225.

John Hancock isn't alone in asking regulators for such hikes. In fact, many, if not all, long-term care insurance firms have asked states to approve rate hikes. (You can review rate increases sought and approved in every state nationwide on California's insurance division website.)

And that's especially so if you've owned their policy for many years and are now living on a fixed income. "A 46% increase can really impact (your) finances," says Einhorn.

What's behind these rate increases? Experts say companies are trying to make up for incorrect assumptions made when long-term care insurance policies were created and sold. It's not, as critics or plaintiffs charge in lawsuits, that companies mispriced or underpriced long-term care insurance policies on purpose. Rather, long-term care insurance — unlike other forms of insurance — is an extremely difficult product to price. Factors that must be weighed include morbidity, lapse rates, mortality and investment income.

At least three factors are to blame for recent rate hikes, according to Jesse Slome, executive director of the American Association for Long-Term Care Insurance (AALTCI).

One, insurers underestimated lapse rates, that being the percent of policyholders who will voluntarily drop their coverage. Insurers estimated that 4% to 5% would drop coverage each year but in reality it's been only 1%. "That makes a huge difference in what an insurer will pay out in claims," says Slome.

Two, claim costs — due to the fact that lower lapse rates means more claimants — are higher than expected. Plus, costs for long-term care are rising faster than the rate of inflation. For instance, the cost of a one-bedroom assisted living facility unit rose on average 4.26% from 2008 to 2013, according to the Genworth 2013 Cost of Care Survey. By contrast, the consumer price index rose just 1.64% per year over the same time period.

Three, insurers have been hurt by sustained, historic low interest rates. According to Slome, a 5% growth of benefits was based on 50% coming from premiums and 50% from investment returns. "But when interest rates drop from 5% to 2% you can't keep growing benefits," he says. "So you need to correct."

Experts says older policies, especially those that have a lifetime benefit and include a 5% annual growth compound option, are the ones most likely to have rate increases. But there have also been large increases on policies even after the National Association of Insurance Commissioners (NAIC) issued rate-stabilizing policies a few years ago.

What options do you have if you're on the receiving end of a long-term care insurance policy rate hike?

Let the policy lapse, though experts generally don't recommend this option, especially since paying $300 to $800 more per year in premiums is still less expensive than the cheapest types of long-term care.

You might consider dropping your old policy and starting a new plan. But experts say this tactic isn't cost-effective. "First, rates in general have increased over the years; second you are now older; third, it is possible your health is not as good as it was when the original policy was issued," Einhorn says.

A 55-year-old couple would have paid, on average, anywhere from $1,816 to $3,725 per year for a long-term care insurance policy in 2013, according to the AALTCI.

Pay the new premium and get same exact coverage you had when you first purchased your long-term care coverage. "If they can afford it, pay it," says Slome. "You can never buy anything similar for anywhere close to the price even after the increase."

Pay your current premium and simply accept reduced benefits, such as your monthly or daily benefit. Besides reducing your benefits, you could increase your waiting period, or reduce the length of your benefit period, say from five to three years, or change the inflation rider from 5% to 3% as a way to keep your premium without your budget, says Einhorn.

A word of caution about reducing your benefits: Once you reduce your benefits in any way, you cannot go backward. "If your health deteriorates," says Einhorn, "you cannot re-establish your original benefit unless you start from scratch with a new plan. On the other hand, you can always reduce benefits in some way at any time."

Finally, your policy might may fall in the category of what's called contingent non-forfeiture option. "If the percentage of premium increase is at a certain level, you may be able to stop paying premiums and you would be entitled to a long-term care benefit based on the amount of premium dollars you have already paid in over the years," says Einhorn.

Other words of wisdom: Don't act without first talking to your financial adviser; consider any rate increase as a good time to evaluate your financial situation and whether it's changed; and earmark some of your savings to pay for rate increases.